Wednesday, April 15, 2009

Will the Obama Stimulus Work?

Will the Obama Stimulus Work?
By Jerome Grossman

President Obama won the battle over the American Recovery and Reinvestment Act of 2009, (also known as the economic stimulus bill) passed by Congress in February. Obama’s supporters consider the passage of this legislation a great victory. That evaluation may be premature. The stimulus must actually work to get our economy out of the doldrums. Then Obama can be congratulated for his political and economic smarts. Of course, it is too early to appraise the result.

The economic stimulus bill will cost the grand total of $787 billion designed to make up for the 6% decline of the U.S. Gross Domestic Product. However, $787 billion represents only 2% of GDP, but the administration expects that gap to be filled by the “multiplier” effect as the 2% is used and reused in the economy. Some economists think $787 billion is too small because 40% goes to tax cuts which have only a small multiplier effect and the expenditures on roads, bridges, buildings, infrastructure etc. may take years to organize.

Then there are those who believe that no stimulus is necessary, that the economy is a self- stabilizing system, that in a downturn, even if nothing is done, normal employment and production will someday return, propelled by the fact that 70% of our economic activity is spent on domestic affairs, mostly food, clothing, shelter, transportation, the military and related services.

The difference between conservatives and liberals lies mostly in whether the stimulus policy can speed up the recovery significantly and whether the enormous expenditures will lead to inflation. Conservatives worry more about the deficit and taxes to pay for the stimulus as well as the inevitable waste in the rush to recovery.

The liberals believe that every month of recession inflicts pain and suffering on millions of people, a condition that must be avoided if possible. They worry less about the deficit and taxes on the grounds that the faster the economy recovers, the smaller the deficit and the higher the tax revenues. Liberals also point to the immediate relief offered by the stimulus’s extension of unemployment insurance benefits, more money for food stamps, etc.

Obama has won the first round. He has his stimulus package. Is it big enough to carry out liberal theory? Will it work in the multiplier effect? Will the economy suffer an additional collapse that will overcome this first rescue attempt? We are in unexplored territory. The lessons and stimulus of the Great Depression of the 1930s may no longer apply. Obama needs to win the second round within a reasonable time to justify his policy. The kind of recovery achieved will be decisive.
Will the Obama recovery be in the shape of V, an immediate bounce off the low point to normality, or U, a delayed recovery, or the dreaded L, an extended recession/depression with no end in sight?


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